Interest rates are likely to remain at 6.26 per cent for the rest of 2017, and inflationary pressures are expected to moderate, according to the latest economic analysis of Papua New Guinea by a Singapore-based research group.

PNG economy compared with peer average (Argentina, Kenya, Cambodia, Tunisia, Vietnam). Source: S&P

The analysis, by BMI Research—a unit of Fitch Group—follows the latest bi-annual monetary policy statement at the end of March. Bank of PNG Governor, Loi Bakani, kept rates on hold for the next six months citing easing balance of payments pressures and expectations for inflation to remain stable.

‘This has prompted us to revise our forecast for the central bank to stand pat on its interest rate decision through end-2017 to support growth, rather than hike its policy rate by 25 basis points to 6.50 per cent in the latter half of the year, as we previously expected,’ Raphael Mok, Asia Analyst, BMI Research, tells Business Advantage PNG.

‘Commodity-driven inflation has likely peaked and will gradually subside in the coming quarters.’

However, Mok warns that uncertainties in the global commodity markets, domestic political instability and a falling kina could lead to an increase in interest rates.

Inflation

Mok expects inflation to be 6.8 per cent this year, down from the forecast 7.2 per cent. He believes commodity-driven inflation ‘has likely peaked and will gradually subside in the coming quarters’.

‘The growth recovery is likely to remain slow and fragile.’

Story continues after advertisment...

‘This will also ease pressure on the bank to lift interest rates,’ he says.

Growth

BMI’s Raphael Mok

Mok predicts PNG’s GDP growth (2.5 per cent in 2016) will recover over 2017 (2.7 per cent) and 2018 (4.3 per cent) as rising oil prices stimulate new investment in the resources sector.

But he says the growth recovery is likely to remain ‘slow and fragile’ despite having been aided by the resumption of operations at the OK Tedi and Porgera mines.

‘Over the coming months, political risks surrounding the upcoming general election and social unrest due to the withholding of royalty payments to landowners will likely continue to act as a drag on the economy.’

Foreign reserves

Although PNG’s foreign reserves fell from US$1.656 billion (K5.25 billion) in September 2016 to USD$1.594 billion (K5.08 billion) at the end of 2017 (according to IMF data), Mok says the pace of decline has slowed considerably compared with the past few years. ‘This signals a gradual stabilisation of the country’s external position.’

‘The PNG economy is subject to resources volatility.’

‘Over the course of 2017 we expect outflows from the financial account to continue due to the ongoing debt servicing for existing mining and LNG projects in the country, but this will likely be offset by a gradual recovery in commodity prices and higher commodity exports.’

Economic resilience

Meanwhile, a report by ratings agency Standard & Poor’s argues that the PNG economy is subject to resources volatility.

‘The government has responded forcefully to the revenue declines by restraining expenditure, to date.’

‘PNG is heavily weighted toward the resources sector, which leaves the government’s debt burden and fiscal flexibility exposed to commodity price cycles, in our opinion,’ the report says.

The report points to ‘significant imbalances in the form of high external debt and larger fiscal deficits’ largely because of the PNG LNG project. ‘That said, most of the current private-sector external debt is in the form of medium to long-term loans associated with the project.’

The S&P report acknowledges that the government has ‘responded forcefully to the revenue declines by restraining expenditure, to date’.

Nevertheless, the economy remains vulnerable. ‘Any renewed weakness in global energy prices, accompanied by modest near-term growth prospects, could slow the recent improvement in PNG’s fiscal performance and external debt position.’